Oil Falls Below $115 but Rebounds After Fed Decision

Reuters

Wednesday, 30 Apr 2008 | 2:34 PM ETReuters

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Oil fell $2 a barrel, extending a retreat from a record high this week to more than 5 percent after a US government report showed crude oil stockpiles rose much more than expected in the world's top energy consumer.

The losses were limited late in the day, however, after the Federal Reserve cut interest rates by a quarter point and indicated that it expects inflation to moderate -- a sign that more rate cuts are possible.

U.S. light, sweet crude settled down $2.17 at $113.46 a barrel, before recovering in electronic activity to $114.62 by 2:50 ET after the Fed rate cut decision. London Brent fell $1.03 to $112.40 a barrel.

"Every time they cut rates and leave the door open for another cut they basically are just giving away the store when it comes to commodity prices," said Peter Beutel, president of Cameron Hanover in New Canaan, Conn.

Interest rate cuts can boost liquidity in the financial markets, brighten the outlook for economic activity and energy demand, and weaken the dollar against other currencies which tends to bolster commodity prices.

Oil prices had dropped steeply earlier in the day after the Energy Information Administration said crude stocks increased by 3.8 million barrels, far more than the 300,000-barrel increase analysts had expected.

"Generally it's a bearish number, particularly on the crude oil side with a larger-than-expected build," said Eric Wittenauer, analyst at Wachovia Securities in St. Louis.

The EIA report also showed a 1.5-million-barrel decline in inventories of gasoline and a 1.1-million-barrel increase in distillate stocks.

Oil's losses followed a more than $3 slide Tuesday when a rebound in the dollar and easing concern about supply disruptions from Nigeria to the North Sea pressured the market.

Despite the recent losses, oil prices remain about five times what they were in 2002, propelled higher by surging demand from China and other developing economies.